Question

Scribd outback outfitters sells recreational equipment. one of the company's products, a small camp stove, sells for $50 per unit. variable expenses are $32 per stove, and fixed expenses associated with the stove total $108,000 per month. the company is currently selling 8,000 stoves per month. the sales manager is convinced that a 10% reduction in the selling price would result in a 25% increase in monthly sales of stoves. what is the impact on net income if the price change occurred?

Answer 1

Their income would decrease by $14,000 per month if the change was made.
First, let's see what the income is right now before changing the sales price.
8000 * 50 - 8000 * 32 - 108000
= 400000 - 256000 - 108000
= 36000
Now let's calculate a new sales price and sales quantity
10% less cost = (1.00 - 0.10)*50 = 0.90*50 = 45
25% more sales = (1.00 + 0.25) * 8000 = 1.25 * 8000 = 10000
Now let's see the projected profits.
10000 * 45 - 10000 * 32 - 108000
= 450000 - 320000 - 108000
= 22000
And the difference in net income...
22000 - 36000 = -14000
Ouch. Not a good idea. They would make $14,000 less after changing their price.